COURSE INCHARGE:
PROFFESSOR: ABUZAR
WAJDI
(DIRECTORATE OF EVENING
PROGRAM)
A REPORT ON THE
ROLE OF STOCK
EXCHANGE WITH
REFERENCE TO
PAKISTAN ECONOMY
SUBMITTED BY
MUHAMMAD ASHAR
SHAMIM
SEAT NUMBER: EP-
0805103
I. Statement of Problem:
A study of Role of Stock Exchange with reference to the
Pakistan Economy, how its activities impact the core macro
economic indicators of Pakistan Economy.
II. Significance of the
Problem:
5. Corporate governance
V. Research Question
How activities of Stock Exchange impact the core macro
economics indicators of Pakistan Economy?
VI. Hypothesis:
To investigate this research, following certain assumptions
has been taken:
These companies use the money they receive from their investors to further their
business and increase profits; increased profit means a higher worth for the
stock. And round and round it goes. Traditionally, those looking to invest went to
a stock broker in any number of brokerage companies who would assist the
investor in the buying and selling of stock and the building of their financial
portfolio.
But in this age of the Internet, investors need only turn on their computer to be
linked into the stock exchange. Subsequently, to keep pace with this changing
economy, online stock brokers entered into this new world of finance in order to
assist virtual customers in achieving their financial goals.
Online stock brokers work within investment companies that offer online
resources as either their entire service or as part of their traditional brokerage
service. Some of the more commonly used online stock brokers are Ameritrade,
ETrade Financial, Fidelity, and Schwab. Such brokers operate much as
traditional brokers - assessing the investor's financial situation, the financial plan
they want to execute, and the stocks in which they are interested.
Working through these online stock brokers, investors create an account where
they can access their financial information at the click of a mouse. Online
brokerage houses offer an extensive amount of information in order for investors
to make informed decisions regarding their trades; stock quotes are kept scrolling
at all times on the website; historical performance on each stock can be
accessed; and in-depth information regarding each company's history and
financial status is available for investors to perform research prior to investing.
Investors turn to online trading and online stock brokers for a variety of benefits,
not the least of which is low broker fees; online broker fees generally run
between $7 and $10 per trade. There is also the control investors have to make
decisions on behalf of their own portfolio.
INTRODUCTION
In this ever-fluctuating financial world, it is very difficult to know the best way to
go about making your money work for you. For generations the stock exchange
has given consumers the opportunity to invest their money into companies that
they felt would perform solidly, thus increasing the worth of their stock. In
essence, the stock market acts as a facilitator between buyers and sellers, as
they exchange stock that they hold in companies.
These companies use the money they receive from their investors to further their
business and increase profits; increased profit means a higher worth for the
stock. And round and round it goes. Traditionally, those looking to invest went to
a stock broker in any number of brokerage companies who would assist the
investor in the buying and selling of stock and the building of their financial
portfolio.
But in this age of the Internet, investors need only turn on their computer to be
linked into the stock exchange. Subsequently, to keep pace with this changing
economy, online stock brokers entered into this new world of finance in order to
assist virtual customers in achieving their financial goals.
Online stock brokers work within investment companies that offer online
resources as either their entire service or as part of their traditional brokerage
service. Some of the more commonly used online stock brokers are Ameritrade,
ETrade Financial, Fidelity, and Schwab. Such brokers operate much as
traditional brokers - assessing the investor's financial situation, the financial plan
they want to execute, and the stocks in which they are interested.
Investors turn to online trading and online stock brokers for a variety of benefits,
not the least of which is low broker fees; online broker fees generally run
between $7 and $10 per trade. There is also the control investors have to make
decisions on behalf of their own portfolio.
Investors are able to choose what stocks they want to buy - regardless of what
the stock broker prefers. Online stock brokers - unlike traditional stock brokers -
do not exert much control over the stocks of the investor.
If you are thinking of getting into the stock market, it may be because you have heard that
the average annual increase in the stock market is 5% per year over the past century. This
somewhat beats the current interest rate on a savings account. If you are looking to invest
for a long time, the fact is that there has never been a thirty year period for the stock market
when investors have not made money. That said, there have been many periods when the
dramatic fluctuations in the marketplace have allowed investors to lose their shirts. When
asked by an eager investor what the stock market would do, J. P. Morgan succinctly replied
"It will fluctuate", and this summarizes both the danger and the opportunity of trading on the
stock market.
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provide online trader training, to new and established traders, wanting to learn how to
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HOW DOES STOCK MARKET FLUCTUATE
Pre-Opening
1. Before the market opens every day, the opening price of each stock
traded on that market is determined. Generally, it will be the same as the
closing price of the stock from the previous day's trading. However, if
something significant happened to the company while the market was closed,
the specialist or market makers in the stock will adjust the opening bid and
offer accordingly. The specialist or market makers will attempt to strike a
balance between the buy and sell orders that were entered prior to the market
opening for the day.
Market Hours
2. During market hours, the stocks are freely trading. Market fluctuations are
caused by an imbalance in supply and demand or, more simply, buy orders
and sell orders. If there are more buy orders for a certain stock than there are
sell orders, the price of that stock will rise. If there are more sell orders for a
given stock than buy orders, the price of that stock will fall. The market
constantly seeks a balance between buyers and sellers, between supply and
demand, and this causes the moment-to-moment fluctuations in individual
stocks and in the overall market.
After Hours
3. The final prices of the stocks are calculated and posted within 30 minutes
of the closing bell. That is when after-hours trading begins. Though after-
hours trading volume is minuscule compared to the volume during market
hours, after-hours trading can give a good indication of what may happen the
next trading day. In addition, stock futures trade after-hours and can provide a
clue or two about what may happen to the overall market the next trading
day. Significant news events, earnings releases, and reports of insider buying
or selling all effect the market sentiment in a given stock which causes
investors to want to buy or sell that stock, forcing the stock market to
fluctuate.
When you’re ready to dive in and start investing in stocks, you first have to choose a
broker. It’s kind of like buying a car. You can do all the research in the world and know
exactly what kind of car you want to buy still; you need a venue to do the actual
transaction. Similarly, when you want to buy stock, your task is to do all the research you
can to select the company you want to invest in. Still, you need a broker to actually buy
the stock, whether you buy over the phone or online.
The broker’s primary role is to serve as the vehicle through which you either buy or sell
stock. When I talk about brokers, I am referring to organizations such as Charles Schwab,
Merrill Lynch, E TRADE, and many other organizations that can buy stock on your behalf.
Brokers can also be individuals who work for such firms. Although you can buy some stocks
directly from the company that issues them, to purchase most stocks, you still need a
broker.
Although the primary task of brokers is the buying and selling of securities (keep in mind
that the word securities refers to the world of financial or paper investments, and that
stocks are only a small part of that world), such as stocks, they can perform other tasks for
you, including the following:
- Providing advisory services - Investors pay brokers a fee for investment advice. Customers
also get access to the firm’s research.
- Offering limited banking services - Brokers can offer features such as interest-bearing
accounts, check writing, direct deposit, and credit cards.
- Brokering other securities - Brokers can also buy bonds, mutual funds, options, Exchange
Traded Funds (ETFs), and other investments on your behalf.
Personal stockbrokers make their money from individual investors like you and me through
various fees, including the following:
- Brokerage commissions - This fee is for buying and/or selling stocks and other securities.
- Margin interest charges - This interest is charged to investors for borrowing against their
brokerage account for investment purposes.
- Service charges - These charges are for performing administrative tasks and other
functions. Brokers charge fees to investors for Individual Retirement Accounts (IRAs) and
for mailing stocks in certificate form.
Any broker you deal with should be registered with the National Association of Securities
Dealers (NASD) and the Securities and Exchange Commission (SEC). In addition, to protect
your money after you’ve deposited it into a brokerage account, that broker should be a
member of the Securities Investor Protection Corporation (SIPC). SIPC doesn’t protect you
from market losses; it protects your money in case the brokerage firm goes out of
business. To find out whether the broker is registered with these organizations, contact
the NASD, SEC, and SIPC.
There is a saying: stock markets have
predicted 10 out of the last 3 recessions.
With plummeting share prices making headline news,
it is worth considering the impact of the Stock market
on the economy. How much should we worry when
share prices fall? How does it impact on the average
consumer? And how does it affect the economy?
The first impact is that people with shares will see a fall in their wealth. If the fall is
significant it will affect their financial outlook. If they are losing money on shares they
will be more hesitant to spend money; this can contribute to a fall in consumer spending.
However, the effect should not be given too much importance. Often people who buy
shares are prepared to lose money; their spending patterns are usually independent of
share prices, especially for short term losses.
2. Effect on Pensions
Anybody with a private pension or investment trust will be affected by the stock market,
at least indirectly. Pension funds invest a significant part of their funds on the stock
market. Therefore, if there is a serious fall in share prices, it reduces the value of pension
funds. This means that future pension payouts will be lower. If share prices fall too much,
pension funds can struggle to meet their promises. The important thing is the long term
movements in the share prices. If share prices fall for a long time then it will definitely
affect pension funds and future payouts.
3. Confidence
Often share price movements are reflections of what is happening in the economy. E.g.
recent falls are based on fears of a US recession and global slowdown. However, the
stock market itself can affect consumer confidence. Bad headlines of falling share prices
are another factor which discourage people from spending. On its own it may not have
much effect, but combined with falling house prices, share prices can be a discouraging
factor.
4. Investment
Falling share prices can hamper firms ability to raise finance on the stock market. Firms
who are expanding and wish to borrow often do so by issuing more shares – it provides a
low cost way of borrowing more money. However, with falling share prices it becomes
much more difficult.
As I said earlier there is an oft repeated quote saying the stock market has predicted 10
out of the last 3 recessions. The point is that falling stock markets do not necessarily
predict the economic future. Share prices can fall without causing a downturn in the
economy. For example, one thinks of the stock market crashes of October 1987; there
wasn’t an obvious economic factor causing this share price fall. The major economies
remained relatively unaffected by this stock market crash.
An overview of K.S.E
The aim of this research is to investigate the performance of Karachi
stock market over the sixty years. Although three stock exchanges
are working in Pakistan but Karachi stock market is a true and active
stock exchange which covers 75% of trading activity. That is why this
research report is focused on Karachi stock market (KSE). Till 1990
the KSE market was narrow and unable to cater to the long term
capital needs of the economy. That is why there was no importance
of KSE in economic development. After 1990 the Govt. took many
measurements to activate the stock market in economic
development. The analysis indicates that the KSE market got
momentum during 1960’s and made significant increase in listed
companies and market capitalization. However, this momentum could
not maintain during 1970’s. The reason was separation of East
Pakistan and Nationalization policy. As a result sixty companies were
delisted and eighteen companies were nationalized. During 1980’s
denationalization policy restored however, the KSE could not get
momentum before 1990. The year 1990 provide new life to Karachi
stock market. The reason is KSE was opened for foreign investors
and financial reforms introduces. As consequences the dept and size
of market improved significantly. However, this achievement could
not continue in later years. To improve the economic performance of
KSE, the management of KSE and C.L.A (corporate law authority)
later S.E.C.P (security and exchange commission of Pakistan) has
taken many measurements. Due to unfavorable economic situation
i.e. high inflation rate, unemployment rate and widening budget deficit
these measurement could not improve the performance of KSE.
Moreover, the KSE is driven by speculative sentiments and insiders
trading have been ruling the market have often resulted in price
volatility as well as price manipulation. The market’s response to
fundamental investment oriented events has been dismal and less
significance. It is suggested that the KSE should improve the quality,
quantity and creditability of information companies discloses to
investing public. The information may address the diversification,
investor’s participation and minimization of unanticipated practices.
Such policy may protect the small investor’s interest that is always
issued for developing and emerging stock markets.
The certain steps were taken from 1985-86 which had positive impact
on investment climate and restored business climate that had
improved stock market activity. As a consequence the number of
listed companies increased from 314 to 438 and market capitalization
increased eight times from Rs. 6.36 billions to Rs. 52.79 billions and
annual turnover also rose up to Rs. 252.9 million.
In 1991, the new Govt. took some steps. Due to these steps stock
market reacted positively and by the end of 1991, the listing
companies rose up to 542 while 61 new companies are listed in stock
market. Market capitalization increased more than double i.e.
Rs.189.518 billion ($7.3 b). Similarly turnover and traded value
increased twice i.e. 361 million. As a result, Pakistan share market
was given 2nd rank among five emerging markets in the world in terms
of returns obtained by investors.
In 1993 Mr. Nawaz Sharif’s Govt. dissolved and care taker Govt. was
formed. The general elections were held and as a result Ms Bhutto
Govt. came into power. The investors gained confidence after
settlement of political crisis and once again the market became
bullish in the last quarter of 1993. As a result, listed companies
increased up to 653 in which 38 companies are new and market
capitalization reached to Rs. 370.247 billion ($ 12.025 billion)
In the first quarter of 1994 the bullish trend was observed in KSE but
in later months up to the end of the year, the market did not maintain
this momentum. This was due to a significant reduction in the annual
production of cotton and political tension between Govt. and
opposition parties. 72 new companies were listing during this year, by
the end of 1994 the listed companies rose up to 724 and market
capitalization increased to 400.554 billion ($ 12.263 billion)
In 1995 was not a good year for Pakistan equity market. Due to
political crisis, discouraging economic outlook, and outbreak of
violence in Karachi. The situation further Detroited by the Mexican
financial crises that discouraged the foreign investors in investing in
emerging markets. KSE 100 index decreased by 26.9% in terms of
local currency and 33.7% in terms of Dollars. 41 new companies
were listed during this year. Turnover was also sluggish and was Rs.
272.397 billion ($ 266.2 million) while total market capitalization
dropped by 24.3% i.e. Rs. 327.781billion.
In 1997 new government came into power which had positive effects
on Pakistan equity market. The main reason was the fact that the
said government had introduced a few economic liberalization
measures during its first tenure. As a result, listed companies
increased up to 782 in which 4 companies are new and market
capitalization reached to Rs. 524.148 billion.
2001 has been quite a dull year in terms of actual stock market
activity in Pakistan. The downward trend showed the reduction of
KSE-100 index. The listed companies were 737 including only three
new companies and the market capitalization was Rs. 296.144 billion.
The bullish trend of stock market continued during 2003 and KSE-100
index touched the highest point i.e. 4604.02. the listed companies
were 705 in which only 6 companies are new and market
capitalization reached up to Rs. 951.55 billion.
VIII. Suggestions:
IX. Conclusion: